Budget bravery more in assumptions than actions

Economists and business groups say the budget is brave - not for the cuts to middle-class welfare, such as the baby bonus - but rather for the assumptions that underpin the return to surplus.

Pre-budget, many bank economists were forecasting deficits throughout the four-year forward estimates of the budget period, but those with a sense of the politics of the budget were generally expecting Treasurer Wayne Swan to forecast a return to surplus sometime in the four years the budget projects ahead.

Even these economists would have been mildly surprised with the projected return to a razor-thin surplus of $800 million in 2015-16, and a more substantial, but still relatively modest, surplus of $6.6 billion in 2016-17.

However, the general consensus among budget analysts and the business community is that the projected return to surplus is a little more credible than the surplus promise for this financial year that was abandoned in December.

"We're being asked to believe that a strategy that hasn't worked to date, the same budget approach, is now going to work," Business Council of Australia chief executive Jennifer Westacott told ABC Radio's PM program.

"So we have some doubts about the capacity to deliver these surpluses given that half of the structural savings, as they're called, are timing shifts or reprioritisations.

"They're not really addressing the fundamental structure of government spending."

The head of the Grattan Institute think tank, John Daley, says it would be harsh to say there have been no moves to improve the fundamental structure of the budget.

"The Government has, with this budget, clearly made some serious steps towards structural reform," he said.

"If you look at the last three budgets and add up all of the discretionary measures, the impact on 2015-16 is that the new spends are matched with new saves and then on top of that there's about $20-odd billion of genuine tax increases.

"That's the cumulative impact of three years' worth of budget decisions, but it means that every year the Commonwealth Government will be collecting about $20 billion more in tax than it used to be."

Optimistic assumptions

However, Mr Daley says to get to a forecast surplus the Treasury has made some very optimistic assumptions.

"This is a budget that's been very much framed around trying to get to at least a rounding error surplus in 2015-16, but in order to do that it's had to make some very big assumptions, both on the income side and on the expenditure side," he said.

"On the income side it's projecting that personal income tax will jump from 10.3 per cent of GDP to 11.5 per cent of GDP by 2015-16 ... that's the highest that income tax will have been since 2001.

"Some of that is about the Medicare levy, some of it is about dribs and drabs, some of it is about bracket creep, but it's still a big change."

Australian Industry Group chief executive Innes Willox says forecast corporate tax revenues for the next four years are equally optimistic.

"Talking about a 7 or 8 per cent increase in company tax take, we don't see that happening in the current economy," he told PM.

"We see the economy slowing over the next year, not gathering pace, and that's where we have some concerns."

In large part, the Treasury is relying on a reduction in mining investment spending, and therefore the related tax deductions, and a ramp up in production to help boost the company tax take.

Structural deficit

Underlying the revenue forecasts, which most analysts see as being very much on the optimistic side of plausible, are economic forecasts which many economists say stretch credulity.

"This looks like a brave set of numbers. Nominal GDP is forecast to grow at or above 5 per cent in each year of the forward estimates period. Now, in the current year it's assumed to grow at a 3.25 per cent," said Stephen Anthony, the head of budget policy at consultancy Macroeconomics.

"Over the forward estimates they're assuming that terms of trade will stay at historic highs. Now that's extremely unlikely and if it doesn't occur we have no chance of achieving an underlying cash budget surplus at the end of the forward estimates period."

According to the Macroeconomics modelling, this budget still leaves the Federal Government in a structural deficit for the four years of the forward estimates, and likely beyond.

"We've got a structural hole in the budget, $15 billion plus, we say that what we need to do is really have a considered review of the spending base, take time, find areas where there can be savings made and do that in an intelligent way than minimises the pain for the Australian people," Mr Anthony said.

A "structural" analysis of the budget looks at the Government's financial position as if factors such as economic growth, the price Australia gets for its exports, revenue growth and so on return to roughly average levels.

Such an analysis takes out the impact of, for example, the still historically high levels of prices for Australia's commodity exports and the positive effect that is having on revenues.

The Macroeconomics forecasts of an ongoing structural deficit therefore show that, if any of Treasury's more optimistic assumptions about the economy and revenues do not come to pass, the budget will likely remain in deficit, much as happened over the past year.

Mr Daley says economic and revenue assumptions are not the only ones he considers as being on the optimistic side, with forecast spending growth well below historical norms.

"This budget makes some very heroic assumptions on that side as well. It essentially assumes that ongoing overall spending growth will only be about 2 per cent in real terms over the next, each of the next three years," he said.

"That's much lower than it's been essentially at any stage apart from the 2002-3 budgets."

At least, unlike the economy and (to some extent) revenue, spending is far more directly within the Government's control.

However, it seems from the expert analysis that this budget again places a surplus more in the hands of a positive shift in economic and revenue fortunes than it does at the feet of tough spending and revenue decisions.